Cognex Corporation

Greetings and welcome to the Cognex Corporation's second quarter 2026 earnings conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone requires operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Greer Aviv, Head of Investor Relations. Thank you. You may begin.

Thank you, Operator. Good morning, everyone, and thank you for joining us. Our earnings release was published yesterday after market close, and our 10-Q was filed this morning. The earnings materials are available on our Investor Relations website. I am joined here today by Matt Moschner, our CEO, and Dennis Fehr, our CFO. Today, we plan to share several key messages, including progress against our strategy, opportunities to drive diversified growth, and market trends, are strong second quarter performance and our expectations for the third quarter and full year. After prepared remarks, we'll open the line for Q&A. Both our published materials and the call today will reference non-GAAP measures. You can find a reconciliation of certain items from GAAP to non-GAAP in our press release and earnings presentation. Today's earnings materials will contain forward-looking statements, including statements regarding our expectations. Our actual results may differ from our projections due to the risks and uncertainties that are described in our FTC filings, including our most recent form, 10-K. With that, I'll turn the call over to Matt.

Thanks, Greer. Good morning, everyone, and thank you for joining us today. Q2 is another strong quarter for Cognex and further evidence that our strategy is driving results. We delivered record quarterly revenue. Significant adjusted EBITDA margin expansion and strong double digit adjusted EPS growth. The demand environment remains favorable with no material negative impact from macroeconomic or geopolitical events. We continue to benefit from an improving industrial cycle while also seeing accelerating adoption of automation and AI enabled machine vision. Importantly, our performance reflects more than cyclical recovery. It reflects focused execution against the strategic objectives we have outlined for Cognex, along with the operating discipline required to convert growth into profitability. Our focus remains on profitable growth, operational excellence, and productivity across the organization. Turning to page three of our earnings presentation, I'll start with a strategy update. First, we are extending our technology leadership and AI-enabled machine vision. using the OneVision platform to enable new AI-driven applications and expand into high-growth end markets, including the data center supply chain. Recently, we announced the general availability of OneVision, with hundreds of customers already using the platform to reduce deployment complexity, shorten time to value, and scale AI-driven vision applications. Second, we are focused on delivering the number one customer experience in the industry. As part of this journey, we are building the most comprehensive and easy to use machine vision ecosystem. Recent product launches have meaningfully expanded the breadth of our portfolio, giving customers access to new cutting-edge capabilities all within the same Insight Vision Suite software environment. Customers can now address entry-level inspection applications with the Insight 2800, perform advanced 3D inspection with the Insight L38, perform complex inspections with the new Insight 3900, and gain maximum flexibility for the most demanding applications with the Insight 6900. Just as importantly, we are making our products easier to evaluate, deploy, and support by enhancing intuitive product setup, expanding self-service resources, and continuing to drive efficiency through a unified software ecosystem. Third, we are focused on driving growth through diversification. We are targeting growth across a broader set of customers, channels, adjacencies, and end markets. While these initiatives will take time, they are central to building a more resilient and scalable business. Let's take a closer look at each of these areas on page four. Starting with customers, we are very pleased with the progress we have made towards our objective of doubling the customer base. In 2025, we added approximately 9,000 new customers, and momentum continued in 2026 with approximately 4,500 new customers added year-to-date. This success meaningfully diversifies the customers we serve and broadens our opportunity set. As we look ahead, our focus will increasingly shift towards a land and expand strategy, building on these new relationships, identifying the right high potential accounts and capturing a greater share of wallet over time. As we continue our Salesforce transformation, we are revitalizing our channel partner program to strengthen our overall go to market. By working more intentionally with our global network of systems integrators, machine builders and services partners, we can better identify new opportunities, fulfill demand more effectively, and bring Cognex products to a broader set of customers, applications, and end markets efficiently. We will also continue to explore opportunities in adjacent markets, both organically and inorganically, where our deep domain expertise can extend to solve critical automation challenges and create meaningful long-term growth. Finally, Thank you for joining us. but is growing more than 30% year over year. While still early, we believe the data center supply chain has compelling strategic characteristics. It is aligned with powerful secular growth trends, requires high levels of quality and throughput, and creates opportunities for Cognex to help customers improve productivity through automation. It also reinforces how our AI leadership can open new growth platforms over time. Turning to page five, let's look at real-world example of how our technology is helping customers solve complex inspection challenges in this market. This is a server rack inspection deployment using our newest technologies, including the Insight 3900 and OneVision. For this application, Cognix Vision systems will be mounted on robots to inspect fully assembled server racks and confirm that all major components are installed correctly and meet strict quality requirements. This demonstrates the broader applicability of our AI-enabled machine vision systems beyond our traditional end markets and also provides an entry point into AI infrastructure manufacturing, a rapidly growing market. Turning to end market performance on page six, the demand environment remained favorable in the second quarter. Growth was led by semiconductor, electronics, and packaging, along with continued momentum from large logistics customers. Manufacturing indicators continue to improve across key regions in the second quarter, and the U.S. Purchasing Managers Index has now remained in expansion territory for seven consecutive months. This improving macro backdrop, along with better visibility into the second half, gives us confidence to raise our full year outlook for nearly all end markets. Starting with logistics, momentum continued, driven by large e-commerce customers. Q2 marked our 10th consecutive quarter of double-digit growth. Given the strength of our first half performance, We are raising our full-year outlook for logistics to high single-digit growth while continuing to expect growth rates to moderate in the second half. Packaging delivered strong performance. Excluding the divestiture of the Japan-focused trading business, packaging grew double digits. Based on this momentum, we are increasing our full-year packaging outlook to double-digit growth. Electronics growth was very strong, with double-digit growth driven by broad-based demand across customers and geographies. AI is driving a new wave of innovation in electronics as manufacturers incorporate increasingly sophisticated functionality into next-generation devices. For 2026, we are increasing our full-year outlook for electronics and now expect double-digit growth. Automotive revenue declined high single digits in the quarter, but was nearly flat year-to-date. Growth in Asia and the Americas was offset by continued weakness in Europe. We are maintaining our full-year outlook for automotive of flat to low single-digit growth. Finally, Semiconductor delivered exceptional performance with strong double-digit revenue across all geographies. Demand continues to be driven by AI infrastructure investment, and based on this strength, we are increasing our pull-year outlook for Semiconductor to double-digit growth. In summary, we are encouraged by the demand environment and pleased with our execution. Cognex is benefiting from both cyclical recovery and structural automation trends, while continuing to diversify the business, expand margins, and position the company for sustainable growth through 2027 and beyond. With that, I'll turn it over to Dennis to walk through our Q2 financials and our outlook for the third quarter and full year. Dennis?

Thanks, Matt, and good morning, everyone. Q2 was a strong financial quarter. It's record revenue and excellent flow through to the bottom line. Page 7 highlights our performance across three key financial metrics. First, adjusted evidential margin was 32.2%. Funding 1,150 basis points year-over-year and marking the 8th consecutive quarter of margin expansion. Second, adjusted EPS increased 80% year-over-year, representing the 8th consecutive quarter of double-digit EPS growth. And third, trailing 12 months, free cash flow conversion rate was 114%, meeting our greater than 100% target for the 7th consecutive quarter. Our strong bottom line performance reflects continued execution of our profitable growth strategy and faster progress on cost reduction initiatives, resulting in about 100% revenue flow through in the quarter. Turning to the income statement on page 8, revenue increased 17% year-over-year, or 16% in constant currency, reaching a record quarterly revenue level for Connex. This was also our 8th consecutive quarter of year-over-year revenue growth. Looking at geographic revenue trends on a year-over-year constant currency basis, China was again our fastest-growing region, with revenue increasing 42%, led by semiconductor and electronics. Year-to-date, revenue in China is up 40%, driven in part by investments made over the past 12 to 18 months. In the Americas, revenue grew 27%, with strength across nearly all end markets. America's revenue also benefited from certain electronics customers ordering through entities based in the Americas rather than Europe. This change does not reflect an underlying shift in business mix or customer demand. Excluding this procurement change, America's revenue still grew double digits. Europe declined 15%. Excluding a procurement change in ordering entities, Europe declined low single digits. Weakness in automotive was partially offset by strengthened semiconductors. Other Asia grew 14%, driven primarily by semiconductor. Staying on page 8, adjusted gross margin expanded 350 basis points to 71.5%, driven by favorable mix and volume. Tariff refunds were not a material contributor to the strong gross margin performance. Adjusted operating expenses declined 3% year-over-year, or 5% in constant currency. supported by accelerated cost reduction actions in the quarter. We now expect approximately $35 million of annualized net cost reductions by the end of 2026. This is closer to the lower end of our originally $35 to $40 million range, reflecting a balanced approach of disciplined cost management in times of strong growth. Looking ahead, our emphasis is increasingly shifting from cost reduction toward productivity optimizations. We see meaningful opportunities to further drive efficiencies through automation and continuous process improvement initiatives by continuing to grow with largely existing resources. Adjusted EBITDA was $94 million, up 81% year-over-year and now highest levels since Q2 2021. Adjusted EBITDA margin reached 32.2%, expanding 1,150 basis points year-over-year and exceeding the midpoint of guidance by more than 250 basis points. Driven by favorable mix and accelerated cost reduction. Adjusted diluted EPS increased 80% year-over-year to 45 cents, driven primarily by operating leverage. Cash generation remained strong. We generated $68 million of free cash flow in the quarter, compared to $40 million in the prior year period, representing approximately 70% growth. Over the training 12 months, free cash flow totalled $268 million and free cash flow conversion was 114%. We returned nearly 80% of free cash flow to shareholders through both share buybacks and dividends over the training 12 months. Moving to page 9, I'll review our third quarter guidance. For Q3, we expect revenue of $300 to $320 million, representing approximately 12% growth at the midpoint. Excluding the $13 million one-time benefit from the commercial partnership in Q3 2025, our guidance implies 17% revenue growth at the midpoint. Adjusted EBITDA margin is expected to be between 32% and 35%, with the midpoint representing an increase of 860 basis points year-over-year. Excluding the commercial partnership benefit, the midpoint implies adjusted EBITDA margin expansion of 1,140 basis points. Adjusted earnings per share is expected to be 50 to 54 cents, as the midpoint representing approximately 58% year-over-year growth. Excluding the commercial partnership benefit, the midpoint implies adjusted EPS growth of 86%. On page 10, we are issuing full year 2026 guidance. While we continue to monitor macroeconomic and geopolitical risks, including memory market conditions and the broader inflationary environment, Our guidance reflects improved visibility into the second half and confidence in our ability to execute our profitable growth strategy. For 2026, we expect revenue of $1.13 to $1.15 billion, representing approximately 15% growth at the midpoint, or 16% excluding the commercial partnership benefit. Adjusted everyday margin is expected to be between 29% and 31%. is the midpoint representing the increase of 850 basis points year-over-year or 930 basis points excluding the commercial partnership benefit. This is well ahead of our prior target of exiting the year at 25% run rate and reflects disciplined execution of our cost reduction initiatives along with an improved demand environment. At the midpoint, our outlook also implies approximately 87% flow through an incremental revenue. up from 70% in 2025, highlighting the substantial operating leverage achieved through our transformation efforts. Adjusted earnings per share is expected to be $1.64 to $1.68, with the midpoint representing approximately 63% year-over-year growth or 71% excluding the commercial partnership benefit. I would note that 2026 adjusted EPS increase Thank you for watching. There are several known items that impact year-over-year comparisons, but do not reflect the change in underlying demand. First, portfolio optimization. As discussed last quarter, the divestiture of our Japan-focused trading business, along with other non-core product exits, reduces revenue by approximately $5 million beginning in Q2 and each of the following three quarters. These actions are intentional and support improved mix, margin, and long-term profitability. Second, as expected, we saw approximately $7 million of electronics order timing shift into Q2 from Q3. Third, Q3 and full year 2026 include the previously mentioned $30 million headwind from the one-time commercial partnership benefit. In summary, Q3 headwinds include order timing and portfolio actions, not a change in underlying demand, while Q4 reflects planned portfolio exits. We encourage you to reflect these factors in your models along with the strong Q4 2025 comparison. Overall, Q2 was another strong proof point for our profitable growth strategy. We delivered record revenue, significant margin expansion, strong EPS growth, and robust free cash flow. Demand remains healthy. Our operating model transformation is delivering results. and our financial model is demonstrating strong leverage. We believe Cognex is exceptionally well positioned to deliver on our commitments and create long-term shareholder value. Now, Matt and I are ready for your questions. Operator, please go ahead.

Thank you. The floor is now open for questions. If you would like to ask a question, please press star 1 on your telephone keypad at this time. A confirmation tone will indicate that your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. We do ask that you limit yourself to one question and one follow-up. Again, that's star 1 to register a question at this time. Our first question is coming from Joe Ritchie of Goldman Sachs. Please go ahead.

Hey, guys. Good morning, and yeah, congrats on the continued progress.

Thanks, Joe.

Thanks, Joe. My first question, I wanted to expand on the data center opportunity that you referenced earlier, Matt. I'm really curious because obviously data center growth has been robust the last couple of years. What I'm wondering, is the opportunity ahead of you now because there are changes in the products that you're offering now? Is there just greater adoption of the machine vision for data centers today? Maybe just expand on what's creating the opportunity for you.

Yeah, no, thanks, Joe. You know, we've been serving the data center market for several years, but it was always a smaller portion of our business. And the application that we served there was, you know, automated and secure drive removal and destruction. I think of this as kind of the ongoing maintenance of the data center What's changed, obviously, is the very aggressive build-out of new facilities, and particularly very high-tech AI-oriented facilities that are placing demands on the supply chain that are driving demand for Cognix Vision. And you can think of it really in three major application areas. On one hand, we're working with the manufacturers of the componentry. These are electronic parts, metal parts, sort of the physical infrastructure of a server and of a rack. There's then the assembly of those things into that rack, and then there is the deployment and maintenance and operations of that. I would say the majority of where the revenue is coming today, and we in our prepared remarks sized that as a low single digits of revenue growing at about 30%. is mostly in that first bucket, right? We're still mostly doing quality assurance and visual inspection for the componentry, right? These are connectors, these are electrical parts, these are PCB boards, these are metal enclosures. We're starting to see activities flow through to CMs that are assembling those into servers, but still quite early in terms of, you know, doing more complete automation once those are deployed into facilities. So, I think we're still more on the early side of the growth wave that could come from, you know, the investment and build out of data centers. I would still characterize it as quite nascent. You know, on the technology side, I mean, for sure, as you saw in the slide, these are very complicated inspections, right? On one hand, hundreds of points to be inspected, very fine features, and very well suited for AI. And we're seeing that. I'm not sure we could have solved these problems, you know, a couple years ago without technologies like One Vision. So, you know, you put those two things together, it's a market we know. It's one that is experiencing a huge wave of growth. And I think our technology is very well positioned to capture that probably for the next several years.

That's super helpful, Matt. And then maybe just my follow-up question for Dennis. Look, and obviously organic growth has been very strong, expected to continue to remain strong throughout the year. Interesting that like your OpEx was actually down on a year-over-year basis. Is the expectation for OpEx through the second half of the year to remain down on a year-over-year basis? I just want to make sure that I have that right in the forecast.

Yeah, Joe, yes, absolutely. I can confirm that. And that's really in line with our expectations. and many more. bringing down the OPEX in this quarter and in the second quarter. 5% in constant currency really kind of shows the strength of the execution there. And we then from there expect probably a bit smaller step downs into the third quarter, into the fourth quarter, right? As the step down from the first into the second quarter was already accelerated compared to what we saw previously. So in short, yes, we definitely expect OPEX to stay well below prior year's levels and also in the second half also below the first half. And that's really kind of part of the strength which we're seeing in the leverage, right? So 100% revenue flows through in the second quarter, 87% revenue flows through at the midpoint for the full year. Really Great to see these numbers and the strength of the execution there. Very helpful. Thank you, guys. Thanks.

Thank you. The next question is coming from Tomo Sano of JPMorgan. Please go ahead.

Hi. Good morning, everyone.

Hey, Tomo.

Good morning. Good morning. Thank you for taking my questions. Matt, at the most recent Automate show, I remember you noted the sense of urgency about the automations. Could you talk about what demos future generate the strongest customer reactions and how it's now translating into the pipeline and DOASD, please? Thank you.

Yeah, thanks, Samuel. It was nice seeing you at the Automate show. It was great to be there. Great energy, and as you said, you know, was to summarize the show in one word. It's really urgency. And what is driving that urgency? I think it's really the realization from manufacturers in North America, but frankly around the world, that their ability to automate and drive efficiency, productivity, at the same time higher levels of quality is table stakes now. It's how they're going to survive and thrive, and it's no longer optional. And so that was very much kind of what was the mood in the air, if you will. specifically your question on which demos that we were showing resonated. I think for sure we were featuring our latest generation of AI tools running on our latest generation of embedded systems. Those are the products that we launched in the spring of this year, OneVision being our cloud training service, and then the 3900 and the 6900 really being the upgraded embedded system hardware to run those models all within the same software environment, which is our Insight Vision Suite and so on. you know, the inspections, right? Cognex has for years led in the area of 2D vision inspection. We've always said that there was still a big untapped market for inspections done by humans that were, you know, in the past not technically feasible to solve with machine vision and we're increasingly solving some of those problems with our latest generation of AI tools. And so we showed very complex PCBA inspections using our 3900 I think that was very well received. Again, back to the data center comment, inspecting these very large server boards as they're being built into servers and put into racks, I think very relevant technology. And then on the other hand, we had a demo on our 6900 where we allowed users to kind of mark up pieces of art, right? And art is very difficult because, you know, it's highly variable in its feature set. There was a bit of glare, and so our systems really performed very well. We were able to pick up very nuanced defects with no incremental training. And so I'd say those two, the 2D inspection demos, featured very well. and that's an area we've really invested in over the last several years where our AI advantage I would say is most pronounced at the moment.

Thank you, Matt. And follow up on Dennis, if you could talk about the current environment through the margin expansions, like how should we think about the lead times and supply chains, inventories? Is there any like bottlenecks and Thank you.

Yeah, no, happy to talk about that. So first in the quarter, we saw strength in the gross margin driven by favorable mix. And then I would also say that certainly on the bottom line, right, the OPEX efficiency which we had there. But to your question on the supply chain side, right, we have been talking about in the prior call that we expected an impact from memory price headwinds in the second half of the year and while we are offsetting as much as we can with that through pricing, we clearly have seen that memory prices are further increasing. In that regard, we would now say about Thank you very much. Memory prices are going up, they're increasing prices, and then memory prices growing up further and will increase prices further. So I wouldn't say like it's a midterm headwind, but it's a headwind for the second half of the year. And then perhaps that you currently would expect that makes still favorable in the second half of the year, but probably not as strongly favorable in the first half of the year. Netregard, our Q3 guide as well as our full year 2026 guide, I expect a gross margin not as strong as in the first half of the year. But nevertheless, we can show strong bottom line performance as we further drive OPEX efficiencies as just mentioned before.

Thank you, Dennis. Appreciate it.

Thank you. The next question is coming from Tommy Moll of Stevens. Please go ahead.

Good morning, and thank you for taking my questions. Hey, Tommy. Good morning. I noted you're halfway toward the 9,000 customers you had in 2025, and I'm curious what KPIs you could share around that progress. Clearly on the net customer ads, there's a lot of progress, but can you share anything in terms of the win rate for these leads that get put into the top of the funnel or the speed of converting those leads? And then relatedly, where are we on the need or lack thereof to continue to hire new cohorts of additional sales folks?

Thank you. Yeah, sure, Tony. Thanks. Yeah, and I'm really happy with the progress we've made. Thank you for joining us. Thank you so much for joining us. Thank you very much. As we acquire customers, as we grow the customer base, how does that apply to our sales organization? It's an area where we've invested significantly over the last five years to grow our direct sales channel. It's one of the biggest assets we have as a company. Hundreds of very talented technical vision experts that consult around the world. But I would say at the same time, our expectation is not to continue to invest in that area as we expand our customer count. And this is really where we are emphasizing our channel partners and how do we revitalize the relationships we have with systems integrators, machine builders, services partners to drive productivity in our sales organization while we acquire new customers and diversify that growth basis. So hopefully that's helpful.

and maybe let me add to that and just re-emphasize what I said also in the prepared remarks. I think 2026 and especially the first half is the time we're really working or have been working to take out costs out of the organization and I think from here it's really about growing the existing resources and that applies to sales but also to the broader part of the organizations and that we clearly are looking forward to

Thank you both. That's very helpful. And Matt, you mentioned the point about strengthening the channel relationships, which also falls under this diversification theme that you've talked about at length today. What details can you share there on channel? Should we think of this as enhancing the prior Thank you.

you know, resellers that are an extension of our sales force, systems integrators and machine builders that add, that incorporate Cognix Vision into their, you know, much larger kind of solutions and machines and then systems, I'm sorry, services partners that are very key to how we deploy at scale machine vision with customers around the world. So, partners is kind of that umbrella term for really those four main categories and and yeah, you can think of us as being a little more coordinated in terms of how we think about the role that they play in each of our geographies. You know, having better scorecards around investments that we're making with them and how do we measure success of those investments. And, you know, again, partner with them to be much more coordinated around our joint go-to-market efforts. So I think it is much more about enhancing Thank you, Matt. I appreciate it. I'll turn it back.

Thank you. The next question is coming from Joseph Giordano of TD Cowan. Please go ahead.

Hi. Good morning. This is Chris on for Joe. Thank you for taking my questions. So, this is the first time that Cognex has issued full year guidance alongside 2Q results. What has changed in the outlook that gives you confidence and visibility to provide the full year at this stage?

On the one side, and Matt talked about it, we see really strong demand across most of our end markets and it has led us to increase the outlook for these end markets. So there's clearly strong conviction in the demand environment. At the same time, I really want to emphasize that there's still a short cycle, low visibility company in that sense. That means typically like a three to four month type of visibility. So we would not be a company issuing Thank you very much. We believe, considering the demand environment where we are, it will be a strong yen demand, but we haven't baked a leg in an exceptional yen demand. And then certainly there's still also uncertainty still around memory prices, for example, how these will develop. So in that regard, there are still some uncertainties out there, but nevertheless, we felt that Thank you.

and, you know, we've spoken about data center on the call. Could you help us put a framework on sizing that opportunity, perhaps relative to some of your other end markets and maybe provide some color on how meaningful you anticipate data center-related revenue could become?

Yeah, Chris, you know, I think we're not prepared necessarily to do a full sizing on full potential. We're in the process of that, as I said before, it's still a very nascent opportunity. And I think many years of future growth ahead of us, you know, we're sizing it today as low single digits of revenue. with a growth path right now of 30%. And so you can kind of extrapolate that, whether that accelerates or decelerates, we're not prepared to say full potential. But again, I think it's an application area and it's a market that really plays to a lot of the advantages we have. and where we've created value for customers in the past. The cost of poor quality is extremely high. These racks are tens of millions of dollars and the cost of downtime is enormous when they're not generating results and tokens. So that's great. The demand to roll them out quickly and scale quickly is high. and so that places a strain on the production capacity up in the supply chain and that's certainly an area where we help with automated inspections during the manufacturing process and then a lot of the component suppliers are Cognix customers already and very familiar with vision and how to apply vision to their own quality inspection process so we're very optimistic that the technology we have and the value we typically provide is very well positioned for this market but as we

Thank you very much.

Thank you. The next question is coming from Jacob Levinson of Nelius Research. Please go ahead.

Hi. Good morning, everyone. Hey, Jake. Good morning. Just expanding on electronics here. I think the expectation is that given all those memory price increases that the actual and consumer electronics are gonna slow from here. So how do you balance that with some of this new data center business you've talked about and your own efforts and new products and the Salesforce changes and your customers CapEx plans? I'll leave it at that, but it seems like there's some nuance there.

Yeah, thanks, Jake. Yeah, I know it's certainly a risk we're thinking about, but I would say it's not one We're really seeing evidence playing out in the business today, meaning higher memory prices, putting downward pressure on demand for automation with our electronics customers. So it's a risk. I would say it's not one that we're seeing manifest yet in the business. Demand remains strong, but that certainly could change. And then I would say our growth Plan and strategy in electronics is multifaceted, right? It's not just about consumer demand and line counts. That's certainly a component. But, you know, there, as we've talked about before, there continue to be shifts in the geographic locations of supply chains out of China to the broader ASEAN region in India. And we expect that to continue, and that's a tailwind for growth. You know, our own technology developments are letting us penetrate further into applications, primarily in 2D inspections. We expect that to continue. And then we are broadening our customer base in this area. You know, as on one hand, there are new entrants to consumer devices that are looking to embed the latest generation of AI technology through consumer hardware. And you can imagine Cognex would be supporting those efforts. So our growth in electronics and then on top of the data centers that you mentioned. So The growth in this area is multifaceted. I think to the extent that memory prices put down our pressure on consumer demand certainly could happen. I wouldn't say we're seeing it yet. And if it does, there's other tools that we would exercise to try to overcome that headwind should it arrive.

And maybe to add to that, I think Historically, certainly end-user demand and volume throughput for our customers is a factor, but it's not the largest factor in terms of our electronics demand. Think about the changes in production are a big factor as well in terms of new form factors, new device types, shift in supply chain locations, adoption of latest technologies. It's probably the much bigger factor which drives our demand in consumer electronics. I just want to also make sure that you're not over-indexing just on the end user demand.

Okay, that's helpful. And just on some of these new AI featured products, if you will, you've had certainly a big uptick in these new product introductions. I think there's always been this promise that the capability and the cost of those products was going to bring that to a level that broaden your TAM pretty considerably especially with some of those customers that maybe don't have the expertise in-house to adopt the older technology. Just trying to get a sense of what kind of uptake you've seen and you talk about packaging as an example market but just trying to get a sense of what kind of uptake you've seen with these products in some of these markets you haven't traditionally been as large in.

Yeah, absolutely. I think, Jake, just to be clear, your question is about as we've been able to roll out AI, more powerful tools into our products, how is that driven penetration? Is that right? Yeah, yeah, great, great. Yeah, no, for sure. I mean... I would say in all of our five verticals it's been helpful but most notably I think you rightly point out in packaging these are historically very difficult areas to perform vision given the high variability of packaging designs and so our latest generation of tools whether it's classifying, defect detecting, segmenting, doing optical character recognition we have great AI-based tools in all those areas and very well positioned for packaging applications so for sure That's an area where we're driving penetration of vision. You know, we've talked about logistics in the past where, you know, today our logistics business is still primarily traceability, which is reading barcodes to track items through fulfillment centers. SLX, which was the product that enabled vision for logistics last year, is seeing great traction. And again, all those tools are fully AI-based, couldn't solve the problem without that technology. Consumer Electronics, very difficult inspections on, you know, you can think of fully populated PCDAs where you're looking for small parts, very densely populated on a board, looking for missing parts, you know, broken solder joints, again, perfect application for AI that we're deploying. semiconductor, very difficult surfaces, shiny, metallic even, silicon wafers. And again, AI is very good at finding defects, scratches, dents, other things that those wafers are being handled and processed. So quite frankly, I think our AI progress on the inspection side is quite broad. Now, the one area I didn't mention was automotive, but you know there I think we're you know automotive as we've said in the past is probably our heavily most heavily penetrated market today with automation but still opportunities there too maybe on a smaller scale so yeah I wish I could say it was one area in particular it is quite broad based and the uptake on the new products has been strong you know these are leading technologies solving novel applications in many cases first of their kind and so you know we're seeing strong demand strong pricing and that is commensurate to the ROIs that those problems have.

So, hopefully that's helpful, Jacob. Super helpful. Thank you. I'll pass it on.

Thank you. The next question is coming from Guy Hardwick of Barclays. Please go ahead.

Hi. Good morning. Congratulations on excellent results. So Dennis, on the guidance, thanks for giving us the four-year guidance, but obviously means we can back out what's implied for Q4. It looks like the step down at the midpoint would be 13% organically, Q4 versus Q3. It's been quite a long time since Cognix has had a double-digit step down. Is it fair to suggest that Q3 guidance reflects the exceptional demand that you referenced, but Q4 doesn't? therefore it appears to have quite a bigger step down than perhaps it should have or is it something or are you just baking conservatism into your guidance there?

I would say this year is a year where you see strong growth in electronics of course also some of the other verticals like semi and packaging but nevertheless electronics is a strong growth driver and that drives more seasonality right so that means in years You have stronger electronics growth you would expect and also a stronger seasonality effect. So in that regard, that's one of the factors here. I would say I look at it but also like first half, second half, right? So if you look at implied revenue for the second half, that's $580 million versus the 560 in the first half of the year. So you see actually an increase of the second half revenue and then you have happy effects, right? I guess some electronic shifts into the first half. You have a stronger effect of the portfolio optimization in the second half of the year. So if you would adjust for that, probably that grows from the first half into the second half is even more than the 20 million, probably more towards the 40 million. In that regard, I think in general, we feel like we see that demand momentum continuing. The only thing I would maybe otherwise point out is that certainly Q4 last year is comparatively the strongest comm which we have as that was the first quarter where we saw a much more favorable demand environment. But yeah, I think in general we feel good about the demand environment.

And just as a follow-up, I understand that Comex put in and a price increase in, I believe, in April. Does that gather momentum through the year and how does that potentially impact gross margins?

So, in general, it appears just the pricing progress which we're making, right? If you think back, 2024 was a year where we had pricing headwinds impacting gross margins or 2025 was a neutral year. I would say in the first half of this year, pricing was a net positive on gross margin, not one of the largest factors, right, so we haven't called it out. Now, for the second half of the year, as I alluded before, memory price impacts are negative in the second half of the year, but, again, it's just more a timing effect that, right, we see memory price increases, we reacted to it, this price increases by itself, we see good traction to that, but probably memory price increases further, probably a bit more than but we had baked them into our first round of price increases so we'll adjust for that and we'll add to that accordingly. So in general I think we'll probably still end 2026 with a net positive on pricing and that's clearly if you think back about the bigger picture on 24 being a headwind mutual 25 and that positive in 26 despite the memory price headwind I think we are quite pleased about the pricing progress which we're making. Thank you.

Thank you. The next question is coming from John Nathan of Daiwa Securities. Please go ahead.

Hi, thanks for taking my question. So I just wanted to ask you a question on strategy. You know, Cognix has generally tried to focus more on online high-speed kind of applications and based on At least there's a picture in the slide for RACs. So with RACs, it seems like this could be a little of a shift. And I'm not saying this is bad, but I'm just wondering if that is the case internally and if that could open even more applications.

Yeah, no, thanks. For sure. I mean, one of the advantages that we have with our technology is, Very accurate inspections, but at line speeds, performing those inspections at sub-second, in some cases, sub-100 millisecond cycle times, which is and will continue to be a focus area for Cognex. But continuous flow manufacturing is one thing, where you have parts that are flying by, whether it be a bottling plant or a logistics conveyor. But, you know, I think that what we tried to convey in the image for the data centers is also somehow a continuous manufacturing line where what you typically see is discrete stations of assembly, but those stations still have pretty high demands on cycle times. Now, those cycle times tend to be seconds or minutes, but it is, I would still consider it, you know, somehow a continuous flow manufacturing operation. and so forth. We're putting a lot of investment in terms of how do we have our vision systems work more natively with the leading providers of robotic manipulation. And I think you're seeing that get deployed in the manufacturing process of data centers, but also many other things. So, Jerem, I wouldn't say it's really a departure from where we focused, which, as you rightly point out, is in-line manufacturing. But the types of that in-line manufacturing... can be variable from continuous flow to more station-based manufacturing, which we would have featured in the data center example.

Did that help? Thanks. If I could ask Dennis a question on pricing. Given the constant changes with supply chains and commodity costs, some of the companies seem to be going for dynamic pricing where they don't kind of, the pricing is kind of increased more regularly. Is that something Cognix would consider? Just to offset some of these inflations?

I mean, yeah, I would say dynamic pricing sounds to me like in ticket selling where you would really do like whatever, every minute a price adjustment. So it's probably not as much as we are pushing it, but clearly in an inflationary environment, which we are in, at least what we think from a supply chain perspective, thinking about more frequent price adjusting is clearly a strategy, but certainly at the same time right there is the sales cycle and you don't want to disrupt also the sales cycle with too many price increases throughout that time. In that regard there might be an opportunity here to think about price increases which are aligning with the sales cycle of a few months but like every few weeks price adjustments or every day a price adjustment is probably not helpful in the sales cycle either. In that regard small opportunity perhaps but but not a major shift.

Yeah, I would also say Cognix captures value through price based on the value created in each of those applications and the variety of applications that we solve is very, very high. And so on one hand, when we say we're working on our pricing initiatives, it's not just about list price increases. It's also about how are we equipping our sales force with better tools to quantify the value and how we plan to capture that value. And so it's more like pricing execution. So keep that in mind as well. It's not just about, you know, continuous list price increases. It's also about how do we better quantify, how do we better articulate and capture the value that our products are creating in an extremely highly variable set of applications. Thank you. Thanks, Nick.

Thank you. The next question is coming from Amit Merada of UBS. Please go ahead.

Good morning, this is Pratap Khan for Amit Narastra. So I want to discuss on the safe growth, like you have been delivering very strong growth and it has been consistent across most of the in-market. So can you help us break it down, like what is driving this in terms of share gains and expansion into near markets versus the underlying market demand? and in addition to this like ISM and other macro indicators have been supportive as well. But do you see the scope for underlying market demand to continue to improve from here?

Yeah, thanks for the question. It's always hard to piece out how much of our growth is market forces versus the quality of our own execution. I think it's a healthy portion of both. I mean on one hand The demand environment is strong. It's marked by our seventh month of PMIs, Purchasing Manager Index and Expansion Territory. And I think Cognex continues to be well aligned with sort of the secular growth trends of automation, you know, scarcity of labor, rising input costs, higher emphasis on product quality. I mean, those things remain. And so you put those together and, yeah, it drives strong demand for automation and particularly machine vision and Cognix being the leader. But on the same token, I think we are executing very well. You know, we've talked about our Salesforce transformation over the last several months, and that's really a couple things. One, we did a lot of work on the organization of our Salesforce to make sure that they were, you know, organized for success, you know, processing tools, making sure that they had leads, that they had, you know, we were fully leveraging our CRM systems that we've invested in. and then of course, there's always the investments we've made in product. We've had great new product introductions over the last 18 months, four in 2025 and maybe our biggest set of launches in April of this year on the AI side. And so, yeah, I think you put those things together. I think our team is executing really well and really the strongest evidence is in the new customer ads that we continue to drive. and at the same time, as I mentioned previously, you know, new customer ads is one thing. We're also spending a lot more time thinking about, you know, I said in the structured remarks, land and expand. What are the potential at the accounts that we already serve and how do we expand our share? And so there we've invested to get better data and we'll be tracking that more rigorously internally. So, yeah, I think it's a strong demand environment. I think we expect that that could persist into 2027. It's still too early to call but we are continuing to drive internal growth initiatives and those are paying off really strongly as well.

That is very helpful. Thank you. Just as a follow-up on that, on the semiconductor market, the growth rate has been very strong. The underlying demand seems very good. So as we look ahead maybe over the next one to two years, Do you believe these levels of demand are sustainable? Are you getting a little bit higher visibility in this market than what you have in the prior cycles?

Yeah, no, thanks. Yeah, thank you. Couldn't be happier with the performance of our semi-business. You know, this is a market that Cognex has been in for decades. And what that really means is the strength of the relationships that we have with leading semi-machine builders and OEMs that, you know, deliver the capabilities to upstream and downstream producers of chipsets. So... Yeah, and it's an area that in the last several years we've been investing in new technologies, whether it be traceability, barcode reading, inspections. And then the acquisition of Moritex in 2023. Moritex as a business was heavily indexed more to semi-OEMs, selling advanced optics and lighting. And so I think you put all that together, I feel like we're very well positioned to continue to capitalize on on the growth momentum that we see in semiconductor. For sure, I'd say this cycle feels different, perhaps more durable than previous semi-cycles. You know, I could imagine how that would extend well into next year and beyond. I think that's really predicated on the continued levels of investment in AI infrastructure. And, you know, should that continue, I would fully expect that that would flow through to strong demand for Cognix products. as we work with our large semi-OEM partners.

Maybe as we got the memory and semi-question across now different end markets and different teams, maybe to summarize it. So that clearly puts and takes, right? I think on the one side, clearly, memory cost was first a headwind for us on the cost side. We feel confident that we can offset that through pricing, taking out some of the timing effects. I get the notion of potential demand impact on electronics which could happen and we also said at the same time end user demand is only one factor which drives our electronics demand and then at the same time we have the positives which is very clearly visible in the semi-business as Matt just outlined we have a positive in the electronics business in the data center market so in general I really want to emphasize that The environment for us is really net, very favorable for us, and it's not a net that has been for us in general. Actually quite positive about what we see from these trends.

Thank you. This brings us to the end of today's conference. I would like to turn the floor back over to Matt Moschner for closing comments.

Thank you for joining us this morning and for your continued support. We look forward to updating you on our progress in the third quarter.

Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines or log off the webcast at this time and enjoy the rest of your day.